BEIJING, Aug 23 (Reuters) - China should diversify its huge
foreign exchange reserves into non-financial assets to hedge
against risks from a long-term decline in the U.S. dollar, Xia
Bin, an academic adviser to the central bank said on Tuesday.

"The Chinese government is certainly worried about (the
safety) of its foreign exchange reserves," Xia told a forum.

"China should reduce the portion of financial assets in its
reserves and increase the portion of non-financial assets," he
said.

Xia said China should use its reserves to buy overseas
energy, resources and equity instead of buying more euro
debt.

China has long advocated diversifying its war chest of $3.2
trillion of reserves away from the dollar, but as much as 70
percent of the holdings are still invested in U.S. dollar
assets, including U.S. Treasuries, according to analysts.

Chinese officials and the public have expressed growing
concerns over the safety of its reserve assets in the United
States after the Standard & Poor's downgrade of U.S. debt.

Xia said China must improve the way it manages the rapidly
accumulating foreign exchange reserves by allowing more
government agencies to manage the assets to better serve China's
"strategic interests".

Xia reiterated his long-held view: that the U.S. dollar is
likely to weaken over the long-term as the Federal Reserve keeps
policy loose to support the weak economy, although the U.S.
currency may rebound in the short run.

Dollar weakness could persist in "the coming decade, two
decades or half a century", he added.

Fears of another U.S. recession and the Fed's ultra-loose
monetary policy have put more pressure on the dollar to weaken
against major currencies as well as the Chinese yuan.
.

China must move cautiously in opening up the capital account
and freeing up the yuan exchange rate, Xia said.

The adviser also urged expansion of channels for yuan to
flow out of the country as a way to give the Chinese currency a
higher international profile.

China's full-year inflation could be between 4 percent and 5
percent in 2011, Xia said, adding that the central bank should
stick to a "prudent" monetary policy.

"Some said that there's over-tightening and there must be a
shift, but that will not happen," he said.
(Reporting by Zhou Xin and Kevin Yao; Editing by Ken Wills and
Ramya Venugopal)